Even as U.S. stock markets have posted solid results in 2017, some of the biggest gains were racked up beyond our borders. The iShares MSCI Emerging Markets ETF (EEM), for example, has surged more than 34 percent in value, the best showing since 2009. The Vanguard FTSE Europe Index Fund ETF Shares (VGK) also rose by a not-too-shabby 25 percent this past year, nicely ahead of the roughly 20 percent gains for the S&P 500.
The global market strength could be traced to supply and demand. Todd Rosenbluth, CFRA’s director of ETF & mutual fund research recently noted that international equity ETFs saw $149 billion in inflows in the first 11 months of 2017, up from just $16 billion in 2016.
Credit for the global rally goes to a broad-based economic expansion. As the International Monetary Fund noted in an October update, “the current upswing reaches more broadly than any in a decade—roughly 75 percent of the world economy, measured by GDP at purchasing power parity—is sharing in the acceleration.”
And the good times appear set to continue. "Global growth has far more self-reinforcing characteristics at present than at any time over the last 20-30 years,” noted analysts at Nomura Securities in a recent report.
Goldman Sachs predicts that the global economy will grow four percent next year, up from a projected 3.7 percent in 2017. Much of that strength will be centered on emerging markets. Economies in those markets are expected to expand by an aggregate of 5.6 percent next year, led by India’s impressive eight percent projected GDP growth rate, according to Goldman Sachs.
You can glean a bout of euphoria in Europe as well, as the European Commission took note of an economic rebound, noting in a November report that the EU economy on track to grow at its fastest pace in a decade this year.
Still, we’re only talking about roughly two percent GDP growth in Europe in 2017, 2018 and 2019, as assessed by the EU’s Autumn Economic Forecast. And Europe is no longer the deep bargain it was a few years ago, trading at 16 times forward earnings.
Also, EU economic affairs commissioner Pierre Moscovici recently cautioned that European economies remain "dependent on policy support.” It’s unclear if a looming end to Europe’s massive bond buying spree and an eventual lifting of interest rates will cause European growth rates to cool once again.
And trouble spots remain on the horizon. The U.K. economy has slowed in the face of a pending divorce from the EU, while Spain is in the midst of its own political turmoil, including Thursday vote where Catalonia's separatist parties won a majority for a new assembly and showed that the secession movement in that wealthy province continues to burn.
In contrast, emerging markets remain on track for robust growth rates, nor are they facing increasingly restrictive central bank policies. Even the weakest EM economies of recent years—such as Brazil, Argentina and Russia—are posting tentative economic rebounds.
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